How was the budget tax burden shared?

Keith Collister

Sunday, May 27, 2012

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THE government's fiscal policy paper for 2012/2013 advises that Jamaica's fiscal budget is based on a "sharp upfront fiscal adjustment", and projects a slightly lower growth rate of one per cent for the new fiscal year. The fiscal deficit is expected to contract to 3.8 per cent of GDP, representing the difference between "above the line" expenditures of $412.258 billion and revenues of $361.282 billion.

Additional tax measures of a combined $19.3 billion are part of a 15.8 per cent overall increase in tax revenues, from $289.882 billion, to $335.625 billion. As a percentage of GDP, the tax package is estimated to be 1.4 per cent of GDP, but 1.8 per cent on an annualised basis, reflecting the different starting dates for the proposed measures. Whilst it is unlikely that the individual measures will all be implemented exactly on time, and the basis for the revenue calculations are clearly not going to be completely accurate, if one annualises all the individual measures based on the individual start dates mentioned in the tax package, then the increase in the total annualised figure for the tax measures, of $24.88 billion, is exactly equivalent to the 29 per cent increase, from 1.4 per cent to 1.8 per cent of GDP, calculated in the fiscal policy paper.

This now allows us to do a very preliminary calculation of how the burden of new taxes has been shared, both on an immediate and annualised basis. A very rough calculation suggests that the largest portion of the proposed increase in taxation is being borne by the tourism sector, followed closely by telecommunications. In addition to the current GCT rate of 10 per cent on the sector, it is proposed that a rate of US$2 per night be imposed on hotels with less than 51 rooms, US$6 on hotels with between 51 and 100 rooms, a rate of US$10 per night on hotels with between 101 and 200 rooms, with hotels over 200 rooms paying US$12 per night. This "modification of the GCT regime for the tourism sector" is estimated to bring in $2.53 billion. However, on an annualised basis, using the September 1st start date suggested in the tax memorandum, this would actually cost $4.33 billion. In addition to room tax, these revenue projections apparently include disallowing the deduction of commissions paid to overseas travel agents from the calculation of output tax for GCT, as well as transportation costs for moving guests, although the deduction from GCT for the gratuity paid to staff, effectively as a form of incentive pay, in an attempt to avoid impacting the workforce directly. In addition, it is proposed that the alcoholic regime on tourism be modified, with a specific special consumption tax (SCT) regime being implemented at a rate of $700 per litre of pure alcohol. This is estimated to bring in $0.53 billion starting on June 1, but on an annualised basis this would be $0.64 billion. On a combined basis, this would represent about a $5-billion increase in taxation on the sector.

This impact is unlikely to stop there however. An increase of 10 per cent in the common external tariff is proposed on items in list C, which includes motor vehicles (such as SUV's) and their spare parts, jewellery (diamonds, wrist watches), glass and alcohol (gin, vodka, liqueurs, cordials, etc), projected to be implemented on June 1st for an estimated revenue gain of $1.95 billion, or an annualised $2.34 billion. In addition, discretionary waivers are to be curtailed as of June 1st, projected to bring in $1.88 billion, which annualised would be $2.26 billion. Out of this combined number of an annualised $4.6 billion, it would seem likely that at least 30 per cent, or $1.4 billion, would represent taxes on items consumed by the tourism sector. This assumes, for example, that the proposed tax increases impact the rent a car, duty-free and hotel sectors, which to some degree will depend on how they are actually administered.

If we assume then, admittedly with very incomplete data, that the combined tax impact could be about $6.4 billion on an annualised basis, the next largest impact is changes to the termination cost for telephone calls of $5.25 billion (or $6.3 billion annualised based on a June 1st implementation date). This is based on increasing termination rates on all domestic calls to the mobile network and fixed lines by JA$0.30 per minute, and by US$0.075 cents per minute on all international calls for termination to the mobile network. The idea here is that this tax increase would claw back some of the anticipated declines in prices from the anticipated OUR driven reductions in interconnection rates.

The change in the asset tax is expected to bring in $1.95 billion, or annualised $2.34 billion, and would appear to mainly impact financial institutions. The net impact of the GCT changes of partially widening the GCT base, expected to bring in $4.2 billion, but reducing the standard rate of GCT from 17.5 per cent to 16.5 per cent, at a cost of $2.4 billion, is $1.8 billion, or $2.16 billion annualised using the planned start date of June 1.

Finally, there are a variety of other tax measures, including increasing the threshold before which GCT is charged to 300 kilowatt hours (but charging the new standard GCT rate), reducing the corporate tax rate (but not for regulated companies), increasing the personal income tax threshold, re-imposition of taxation of domestic dividends, a minimum income tax of $60,000, change in the SCT regime on overproof rum, increasing motor vehicle fees, increasing the tax rate on winnings for betting, gaming, horse racing and lotteries, and SCT on raw tobacco and denatured alcohol.

Overall, on a full 12-month basis, it is a very severe tax package. This fiscal year, the $19.36-billion revenue gain projected for the rest of the fiscal year is supplemented by $4 billion from NHT, split between $3 billion in NHT tax arrears and $1 billion for specific projects. However, there is a clear assumption that on an ongoing basis the planned adjustment of 1.8 per cent of GDP should satisfy the multilaterals and bond markets. The key question now is whether these proposed sectoral burdens are sustainable, or if they would instead do more harm than good, which we shall explore in future articles.


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